Rating action

Scope Ratings GmbH (Scope) has today assigned final ratings to the notes issued by Scalabis STC, S.A., a cash securitisation of a EUR 1,472.4m³ portfolio of Portuguese NPLs originated by LX Investment Partners II & III.

Class A (ISIN: PTSZIAOM0009), EUR 80,000,000: rated BBB_SF

Class B (ISIN: PTSZIBOM0008), EUR 25,000,000: not rated

Class J (ISIN: PTSZICOM0007), EUR 20,000,000: not rated

Transaction overview

The transaction is a static cash securitisation of five NPL sub-portfolios: BCP-04, NB-01, CGD-01, BPI-01 & BCP-06, originally acquired between 2019-2021 through two investment vehicles (LX Investment Partners II & III), from four financial institutions in Portugal (the original lenders). The portfolio is serviced by Algebra Capital.

The pool is mainly unsecured (94.2% of outstanding balance) but also includes a small share of secured loans (5.8% of OB), as well as a few REO properties (EUR 2.4m in property value). Loans were granted to corporate or small and medium-sized enterprises (65.9%), as well as to individuals (34.1%). Secured loans are backed by residential and non-residential properties (42.5% and 57.5% of the total first-lien property value, respectively), that are rather concentrated in the Lisbon district (32.5%). The total pool value, defined as the total outstanding balance of loans plus the total underwritten valuation amount of the REO assets in the portfolio (EUR 2.4m), stands at EUR 1.48bn.

The structure comprises three classes of notes: senior class A, mezzanine class B, and junior class J. Class A notes will pay floating rate indexed to three-month Euribor, plus a margin of 2%. Class B notes will pay a fixed interest rate of 6%. The class B interest rate payments rank senior to class A principal. However, they will be subordinated if the cumulative amounts collected are 10% below the level indicated in the servicer’s business plan, or if the present value cumulative profitability ratio falls below 90%. The structure also contains an equity leakage feature, which allows for a pre-amortisation of class B using up to 10% of the issuer remaining funds after the payments of class A and B interests, as well as class A principal, in case the cumulative collection ratio and the NPV cumulative profitability ratio are both above 110%.

Class J principal and interest are subordinated to the repayment of the senior and mezzanine notes. The issuer will also enter an interest rate cap agreement to hedge interest rate risk. Upon the maturity of the cap agreement, the terms of rated notes imply a cap on the payable base rate.

Rating rationale

The rating is primarily driven by the expected recovery amounts and timing of collections from the non-performing loans and REO assets portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics as well as Scope’s economic outlook for Portugal and its assessment of the servicer’s capabilities. The rating is supported by the structural protection provided to the notes, the liquidity reserves available to the noteholders and the interest rate hedging agreement. The rating also addresses the issuer’s exposure to key counterparties, with the assessment based on counterparty substitution provisions in the transaction and, when available, Scope’s ratings or other public ratings on the counterparties.

Key rating drivers

Existing agreements with borrowers (positive)^1,3. The servicer has already reached a certain number of agreements or payment plans with some borrowers (2,219). While these loans only represent a small share of the portfolio’s outstanding balance (3.3%), they consist of more regular flows of recovery amounts which amount to 14.5% of our Class A gross collections.

Strong alignment of interest (positive)². LX Partners acts as originator and retention subscriber in this transaction, holding 100% of the mezzanine and junior notes. This feature, along with the servicing fee structure, incentivises the servicer, Algebra Capital (fully owned by LX Partners), to maximise recoveries and adhere to the initial business plan.

Strong interest rate protection (positive)². The structure features an interest rate cap agreement, effective from the closing date until (and including) the note payment date in July 2028, which provides an interest risk hedge for the Class A notes. The interest rate cap notional adequately covers the expected class A outstanding balance under the stressed scenarios considered by Scope.

Portfolio onboarding activities already completed (positive)². The sub-portfolios have been serviced by Algebra Capital for between 0-2 years as of the closing date. Therefore, there is no onboarding or ramp-up period.

Exposure to unsecured positions (negative)¹. Approximately 94% of the pool consists of unsecured loans. We typically observe lower recovery rates for NPLs with no security, particularly when they have been classified as defaulted for a relatively long time (7.9 years) and were granted to corporate borrowers (65.9% of the unsecured pool). This is mitigated by the experience and capabilities of the servicer in the unsecured space.

Overperformance event (negative)². The structure includes a provision which diverts 10% of the available cash flow after payments of class A and B interest to the repayment of Class B principal, in case the cumulative collection ratio and the NPV cumulative profitability ratio are both above 110%. Such overperformance event only applies after 12 months from closing.

No back-up servicer or BUS facilitator (negative)². No back-up servicer or facilitator is in place to assist in the event of a replacement of the servicer or master servicer. However, strong liquidity and the master servicers’ undertaking to assist in appointing a replacement mitigate the risk of servicer disruption.

Low class A coverage (negative)³. The coverage of gross collections over Class A notes stands at around 133%, a level lower relative to other European NPL transactions rated in the BBB category by Scope. This is mitigated by the relatively short WAL of the class A notes.

Rating-change drivers

Lower than expected default rate on payment plans (upside). Scope has applied a rating conditional haircut to the proceeds expected from the existing agreements with borrowers, in order to capture the default risk on those loans. Robust performance of such agreements could positively impact the rating.

Servicer outperformance on recovery timing (upside). The pandemic led to a slowdown of court activity. If courts advance on legal proceeding backlogs faster than expected an outperformance on recovery timing could occur. This could positively impact the rating.

Higher than expected expenses (downside). Asset-carry costs, such as property taxes, and asset management fees depend on the liquidation timing of the underlying assets. Therefore, these costs could substantially increase in a materially illiquid market or due to unfavourable legal developments. This could negatively impact the rating.

Long-lasting pandemic induced crisis (downside). Recovery rates are generally highly dependent on the macroeconomic climate. After a GDP contraction of 8% in 2020, our baseline scenario for Portugal foresees a rebound with 4% growth in 2021. If the current crisis lasts beyond our baseline scenario, however, liquidity conditions could deteriorate, reducing servicer performance on collection volumes. This could negatively impact the rating.

Quantitative analysis and assumptions

Scope analysed cash flows, reflecting the transaction’s structural features, to calculate each tranche’s expected loss and weighted average life. As the first step, Scope analysed the assets to produce a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.

Scope performed a specific analysis for the portfolio’s unsecured loans, based on the historical data provided by the servicer and covering its acquisitions since 2016. The historical dataset comprised loans, which are representative type of exposures and lender’s share in the portfolio. However, historical data does not cover the entire life of loans since their default, but only since their acquisition by the servicer. Furthermore, Scope considered the special servicer’s capabilities when calibrating lifetime recoveries. Scope also considered that unsecured borrowers were classified as defaulted for a weighted average of 7.9 years (excluding loans with a missing default date) as of the cut-off date of 30 April 2021.

Both for secured loans and REO assets, collections were mainly based on the most recent property appraisal values, while being stressed for the servicers’ appraisal methodologies and liquidity and market value risks. For secured loans, recovery timing assumptions were derived using line-by-line asset information detailing the type of legal proceedings, the court in which the proceedings are ongoing, and the stage of the proceeding as of the cut-off date. Furthermore, we apply a line-by-line approach to derive time-to-sell assumptions for all collateral and REO assets, considering the property type and market liquidity. Scope also considered historical data provided by the servicer.

For analysis of the class A notes, Scope assumed a gross recovery rate of 7.2% (as a % of pool value) with a weighted average life of 3.6 years. By portfolio segment, Scope assumed a gross recovery rate of 23.8% for secured loans and 6.2% for unsecured loans. For the REO portfolio, we assumed gross sales proceeds amounting to 60.0% of underwritten valuation amounts of the properties. Scope has applied an average combined security value haircut of 36.7% to underwritten valuation amounts, which consists of i) an average fire-sale discount (including valuation type haircuts) of 21.5% to security values, reflecting liquidity or marketability risks; and ii) property price decline stresses (19.4% on average), reflecting Scope’s view of downside market volatility risk.

Scope’s analysis considered the servicers’ fee structure and legal expenses at around 16.7% of lifetime gross collections. Scope captured single asset exposure risks by applying a recovery rate haircut of 10.0% to the 10 largest borrowers in the analysis of the class A notes.

Sensitivity analysis

Scope tested the resilience of the rating against deviations in the main input parameters: the portfolio recovery-rate and the portfolio recovery timing. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

For class A, the following shows how the results change compared to the assigned credit rating in the event of:

• a decrease in secured and unsecured recovery rates by 10%, one notch.
   
• an increase in the recovery lag by one year, zero notches.

Rating driver references
1. Loan-by-loan data tape of the securitised pool (confidential)
2. Transaction documents (confidential)
3. Scope’s calculations (confidential)

Stress testing
Stress testing was performed by applying Credit-Rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow SF/EL Model Version 1.1, incorporating default and recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for this Credit Rating, (Non-Performing Loan ABS Rating Methodology, 9 September 2020; Methodology for Counterparty Risk in Structured Finance, 13 July 2021; General Structured Finance Rating Methodology, 14 December 2020), is available on https://www.scoperatings.com/#!methodology/list.
The model used for this Credit Rating is (Cash Flow Model v1.1.) available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

Solicitation, key sources and quality of information
The Rated Entity and its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources. 
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset audit. The external asset audit was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating is based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Cyrus Mohadjer, Senior Analyst.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The preliminary Credit Rating was first released by Scope Ratings on 2 August 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings. 

Conditions of use / exclusion of liability
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